The opinion of the court was delivered by: Sandra S. Beckwith, Chief Judge United States District Court
This matter is before the Court on Defendant Homer Richardson's motion to dismiss, or in the alternative, to suppress (Doc. No. 105) and motion for an early proffer of evidence on the existence of a conspiracy from the government (Doc. No. 111). For the reasons that follow, Defendant's motions are not well-taken and are DENIED.
On April 7, 2005, the grand jury in this district returned a twenty-eight count indictment charging Defendants Wilson Moss Graham, Mitchell R. Graham, Homer Lee Richardson, Barton Richardson, Robert L. West, and Robert C. Welti, with conspiracy to commit offenses against or to defraud the United States, in violation of 18 U.S.C. § 371*fn1 (Count 1), and various other federal tax offenses. As is relevant here, in addition to the conspiracy count, the indictment also charges Defendant Homer Richardson with four counts of aiding in filing a false tax return, in violation of 26 U.S.C. § 7206(2) (Counts 10, 11, 12, and 17), and three counts of filing a false tax return, in violation of 26 U.S.C. § 7206(1)*fn2 (Counts 26, 27, and 28).
The indictment arises out of the Internal Revenue Service's investigation into Defendants' alleged use and promotion of domestic and foreign trust schemes marketed by The Aegis Company. A full explanation of the inner workings of these trusts is not necessary at this time. The indictment alleges that the Aegis Trust enables the purchaser of the trust product to engage in a series of sham transactions for the purpose of concealing income from the Internal Revenue Service. The indictment alleges that the Defendants assisted others in transferring their assets to these trusts, made false representations to their clients concerning the taxation of these transactions, and assisted their clients in preparing and submitting false income tax returns to the IRS. The indictment alleges that the Defendants thus conspired to defraud the United States by impeding, impairing, obstructing, and defeating the governmental functions of the IRS in the ascertainment, computation, assessment, and collection of income taxes. The indictment also alleges that the Defendants conspired to assist others to prepare and present false income tax returns to the IRS.
As the Court will explain in more detail below, Defendant Homer Richardson has for a number of years been the subject of both civil and criminal investigations by the IRS because of his personal use of the Aegis Trust package and promotion to others of the Aegis package. Richardson now moves the Court to dismiss the indictment on the grounds that in bad faith the IRS instituted a civil investigation for the purpose of collecting evidence for a criminal prosecution in violation of his Fourth and Fifth Amendment rights. Alternatively, Richardson argues that the Court should suppress evidence seized by the IRS from his business office because the affidavit in support of the search warrant did not establish probable cause. Richardson further contends that the Aegis trusts were business trusts under Ohio law, and thus were a legitimate form of business organization. In other words, Richardson apparently argues that the Court should dismiss the indictment because he did not engage in any conduct which violates the Internal Revenue Code. Finally, Richardson claims that he had a First Amendment right to advocate the use of tax shelters. In a separate motion, Defendant moves the Court to hold a pre-trial evidentiary hearing on whether there was a conspiracy as alleged in Count 1 for the purpose of obtaining rulings on the admissibility of co-conspirators' statements. The Court takes up these issues seriatim.
II. Motion to Dismiss the Indictment
The pre-indictment proceedings and events between the Defendant and the IRS were complex and intertwined, involving, as noted, both civil and criminal investigations of the Defendant's activities with Aegis. Before going further, a brief explanation of the organizational structure of the IRS may assist in comprehending these events:
The IRS splits the responsibility for enforcing the nation's tax laws between its two investigative divisions. The Criminal Investigative Division ("CID") is charged with investigating criminal violations of the tax code and related federal statutes. CID investigators are called "special agents." Like many other criminal law enforcement agents, they carry firearms and badges. In addition, special agents must recite an administrative warning prior to soliciting information from taxpayers. See Beckwith v. United States, 425 U.S. 341, 343, 96 S.Ct. 1612, 48 L.Ed.2d 1 (1976) (quoting warning provided by special agents).
On the other hand, the Examination Division of the IRS is responsible for conducting civil tax audits. Examination Division investigators are known as "revenue agents." In contrast to special agents, revenue agents do not carry firearms; nor are they required to provide taxpayers with an administrative warning. Although an Examination Division audit typically concludes with some sort of civil settlement between the IRS and the taxpayer, such an audit may uncover evidence that causes the revenue agent to refer the case to the CID for criminal investigation. Under IRS regulations, a revenue agent who uncovers a "firm indication of fraud on the part of the taxpayer" must immediately suspend her audit and refer the case to the CID.
United States v. McKee, 192 F.3d 535, 537-38 (6th Cir. 1999) (quoting United States v. Peters, 153 F.3d 445, 447 (7th Cir. 1998)).
B. The IRS Investigates Defendant's Activities
1. The Civil Investigation Into
Defendant's Personal Returns The IRS commenced a civil investigation into Defendant's personal tax returns in July 1999. On July 13, 1999, Revenue Agent Bob Listermann mailed Defendant a notice that the IRS had received information that he was involved in a trust arrangement used for tax avoidance purposes. Doc. No. 116, Ex. 6, Morgason Aff. ¶ 2 & Ex. A This notice concerned the 1996 and 1997 tax years. Attached to the notice was a copy of IRS Notice 97-24, which sets forth the IRS's position on abusive trusts. The notice further advised the Defendant that he had the option of filing amended tax returns in the event he determined that his trust arrangement had any of the abusive elements described in Notice 97-24. In the event he determined that his trust arrangement was not abusive, the notice requested the Defendant to provide a copy of the trust or will instrument, a list of assets of the trust, a list of beneficiaries, a fiduciary declaration, and a list of trustees. As authority for this document request, the notice cited Treasury Regulation 1.6012-3(a)(2).*fn3
Defendant responded to Agent Listermann's notice on July 26, 1999. Id. Ex. B. In his letter, Defendant stated that his legal counsel had assured him that his trust was being operated in a manner that complied with the Internal Revenue Code. Therefore, Defendant stated, he saw no need to file amended tax returns. The remainder of Defendant's response simultaneously disputed Agent Listermann's authority to obtain documents pertinent to the trust and inquired for what purpose he intended to use the documents requested. Defendant expressed concerns that providing the documents would operate as a waiver of his constitutional rights. In the end, however, Defendant refused to provide the documents the agent requested until his questions and concerns were answered. See id. at 4.
According to Revenue Agent Morgason, Defendant's response to Agent Listermann's notice, combined with the indications from his tax returns that he was involved in an abusive trust, caused Agent Listermann to initiate a civil examination of the Defendant and his wife. Morgason Aff. ¶ 4. Agent Morgason states that when CID initiates a criminal investigation, it puts a code into the IRS tracking system which informs the civil division of that fact. Agent Morgason states that no such code was on Defendant's file at this time. Agent Listermann scheduled an appointment for a civil examination for September 7, 1999, for which the Defendant did not appear. Id. Agent Listermann did summon records of the Defendant from third parties. Id. ¶ 5. of Defendant in November 1999. Id. ¶ 6. Agent Morgason states that by February 11, 2000, based on the evidence gathered, there were firm indications that the Defendant was involved in criminal activity. Id. ¶ 7. Therefore, the agent states, he closed his civil examination and referred Defendant's case to the Small Business/Self-Employed division to confer with CID to determine whether a criminal investigation should be initiated. Id. Agent Morgason states that the official referral to CID occurred on February 17, 2000. Id. The CID began its criminal investigation on March 8, 2000. Doc. No. 105, Ex. 17.
Although Defendant claims that he actually overpaid taxes for 1996 and 1997, his affidavit in support of his motion, id. Ex. 1, corroborates Agent Morgason's affidavit to the extent that there is no dispute that he did not cooperate with the agents' civil examination. See id. ¶¶ 11, 12. Defendant does not claim in his affidavit that he surrendered any documents to the IRS because of the civil examination of his personal tax returns.
2. The March 2001 Search of Defendant's Office
On March 29, 2001, Special Agent Martha Williams obtained a warrant to search Defendant's office, located at 410 West Loveland Avenue, Loveland, Ohio, from Magistrate Judge Jack Sherman.*fn4 The warrant authorized the seizure of a variety of documents, records, books, electronic data, computer storage data, and computer files connected with possible violations of 18 U.S.C. §§ 371, 1341, 1343, and 1956, 26 U.S.C. §§ 7201, 7206(1), and 7206(2), and 31 U.S.C. § 5316. An inventory of the items seized during the search of Defendant's office is located at Doc. No. 116, government's exhibit 11.
3. The Civil Investigation of Defendant as a Promoter of Abusive Trusts
Agent Morgason states that he and other revenue agents continued to audit clients of Defendant's and concluded that he was continuing to promote the Aegis trust system. Morgason Aff. ¶ 9. Therefore, in June 2002, Defendant was referred to the IRS's Lead Development Center to authorize an investigation of Defendant as a promoter of abusive tax shelters in violation of 26 U.S.C. §§ 6700*fn5 and 6701.*fn6 Id. Sections 6700 and 6701 provide for the imposition of civil penalties for violations. Additionally, 26 U.S.C. § 7408 authorizes the United States to file a civil action to enjoin conduct which constitutes a violation of these sections. United States v. Gleason, 432 F.3d 678, 682 (6th Cir. 2005).
According to Agent Morgason, the investigation into Defendant's alleged violations of § 6700 began on July 23, 2002. Id. ¶ 10. Agent Morgason states that this investigation was conducted independent of any ongoing criminal investigation and was developed solely from civil audits and interviews conducted by other Revenue Agents. Id. Agent Morgason states that he did not participate in any criminal investigation meetings concerning the Defendant and he did not receive any information from Special Agents concerning the Defendant. Moreover, he did not issue any administrative summonses during this investigation. Id.
On October 3, 2002, Agent Morgason notified Defendant that the IRS was considering possible action against him, including an injunction action and imposition of penalties, pursuant to §§ 6700 and 7408. Morgason Aff. Ex. C. Agent Morgason scheduled a meeting with the Defendant on October 31, 2002, at which time he was invited to present facts or legal arguments in opposition to the imposition of penalties. Id. Agent Morgason also issued a Form 4564 document request which, inter alia, asked the Defendant to provide documents relevant to the Aegis Company. Id. Ex. D.
The meeting between Agent Morgason and the Defendant actually took place on November 8, 2002. Present at the meeting were Agent Morgason and Richard Hassebrock, a senior attorney for the Small Business/Self-Employed Division, the Defendant and co-defendant Robert Welti. The Defendant hired a private court reporter to transcribe the meeting. The transcript of this meeting is Exhibit E to Agent Morgason's affidavit. The transcript reveals that the Defendant spent about half of the meeting presenting Agent Morgason with information and case law which purportedly endorsed the legitimacy of the business trust.
The remainder of the meeting consisted of the Defendant contesting Agent Morgason's authority to ask him questions. The Defendant in fact refused to answer any of Agent Morgason's questions and he did not provide any documents responsive to the Form 4564 request. See id.; Morgason Aff. ¶ 12.
Agent Morgason had a follow-up meeting with the Defendant on December 17, 2002. See Morgason Aff. ¶ 13; Morgason Aff. Ex. G (transcript of meeting). This meeting was essentially a repeat of the November interview - the Defendant contested Agent Morgason's authority and did not answer any substantive questions. Defendant does not contend anywhere in his papers ...